19 April 2012

Cree’s revenue hit by transition in lighting agents after Ruud acquisition

For its fiscal third-quarter 2012 (ended 25 March), Cree Inc of Durham, NC, USA has reported revenue of $284.8m, up 30% on $219.2m a year ago but down 6% on last quarter, and below the targeted $290-310m.

Both LED and Power & RF revenues were in line with targets. Revenue for Power & RF devices grew by 22% from last quarter’s $14.2m to $17.3m as demand in both product lines started to improve. Revenue for LED products (components, chips and materials) was $180.9m, down 6.8% on $194.2m last quarter but in line with seasonally lower targets. In particular, LED component sales improved following the Chinese New Year. Sales through LED component distributors were lower than fiscal Q2 but in line with seasonal trends, and channel inventories were in a similar range.

However, revenue for Lighting products (indoor & outdoor LED lighting plus traditional lighting systems) fell a more-than-expected 9.6% from $95.7m to $86.5m. Both product lines lost momentum short-term as a result of Cree’s transition to new agents during the integration with Ruud Lighting Inc of Racine, WI, USA (acquired last August) causing greater-than-expected disruption to the project pipeline. Sales for the Cree indoor product line were most affected due to shorter project cycles, with some projects being delayed and some proceeding instead with traditional lighting technology in the near term. The changes to agents is intended to drive revenue synergies in fiscal first-half 2013. “We do not believe that the decrease in lighting sales was an indication of lower end-user demand,” comments chairman, CEO & president Charles M. Swoboda.

On a non-GAAP basis, gross margin was 35.6%, down from 42.4% a year ago but rebounding slightly from 35.3% last quarter (and in the middle of the targeted range of 35-36%), despite the lower-than-expected revenue due to ‘solid execution across the company’. Pricing declines were offset by slightly higher factory utilization, combined with cost reductions and improvements in productivity and yield.

Operating expenses have risen from $76m last quarter to $76.9m. In particular, while R&D expenditures were flat sequentially, SG&A (selling, general & administrative) expenditures rose by $0.5m, although this was about $2m lower than expected due mainly to lower-than-planned selling expenses and legal fees. Operating margin has continued to fall, from 14.9% a year ago and 10.3% last quarter to 8.6%.

Net income has fallen from $30.1m a year ago and $28.7m last quarter to $23.3m. Cash flow from operations was $48.3m (down on $81m last quarter). Property, plant and equipment (PP&E) capital expenditure was cut slightly from $23m last quarter to $22.2m but, including $4m of patent spending, total CapEx was $26m. Although down from $58m last quarter, free cash flow was hence $22m, boosting cash and investments rose from $687.2m to $710.1m. “Our ability to generate solid free cash flow in a challenging market bodes well for the company as we target increased revenues in Q4,” comments Swoboda. “We continue to be in a strong position to significantly increase LED chip production from current levels with modest capital spending, and we are well positioned to support significant growth in LED lighting,” he adds.

Over the last several weeks, Cree has launched several new lighting products. These include:  

• XSP Series LED street-lights (the first Cree outdoor product to leverage an integrated development approach from the LED chip to the lighting system), which more than double the lumens per dollar (increasing payback);
• an expanded CR Troffer Series to address more applications and eliminate the use of fluorescent technology in new or retrofit commercial and industrial settings;
• the Aeroblades outdoor lighting product line (the first outdoor product to take full advantage of the latest generation of high-power LEDs).

Regarding LED components, Cree has launched the XLamp XT-E LED, the second product based on the new SC3 Technology Platform (which doubles the lumens per dollar of lighting-class LEDs). Also during the quarter, Cree started shipping both its XLamp XB-D and XT-E products (based on the firm’s new SC3 Technology Platform). Cree also recently launched high-voltage versions of these products. “There’s a lot of design activity around these products, both for new design as well as upgrades to existing ones,” says Swoboda. “We target incremental revenue growth from these products in Q4 and a growing pipeline of design activity for the first half of fiscal 2013,” he adds.

Cree also recently launched its next-generation XLamp MT-G LED (based on the SC3 Technology Platform), which is 25% brighter than the previous version. It also released an expanded portfolio of XLamp LMH2 modules (now available in 2000 and 3000lm versions). The firm has also set a new R&D record with a prototype LED with luminous efficacy of 254 lumens per watt.

The lighting order rate has improved for both indoor and outdoor products. LED customers continue to maintain low inventory levels and rely on short lead-times, but the demand forecast from both customers and distributors has improved, says Cree.

“We continue to closely manage inventory in LEDs and Power & RF to similar levels as Q2 while working to respond to short lead-time expectations in the market,” says Swoboda. Overall inventory increased by $9.5m to $196.8m (from 85 days to 96 days of inventory on hand). LED and Power & RF inventories fell slightly, while inventory in Lighting products rose in anticipation of new product launches and higher demand in fiscal Q4.

“Overall company backlog is stronger than it was at this point last quarter, with Lighting, LEDs and Power & RF all tracking ahead of Q2,” notes Swoboda. “We see good trends in lighting and LEDs, but we still have limited order visibility.” Both product lines are operating with short lead-times, which increase the variability and reduce the accuracy of forecasts.

For its fiscal fourth-quarter 2012 (ending 24 June), Cree targets 7.5% revenue growth to $295-315m. This includes double-digit growth in Lighting (driven by strong growth in indoor and outdoor sales); single-digit growth in LED product sales (for both direct and distribution customers); and incrementally higher Power & RF sales. Non-GAAP gross margin is targeted to rise to 36%, depending on slightly improved factory utilization and cost-reduction efforts, offset by product mix and the competitive environment. “The LED market remains very competitive, but we target improved margins as our new products gain traction in the market,” says Swoboda.

Operating expenses are targeted to rise by $4m, all due to SG&A expenses. The increase in selling (sales & marketing) expense is due mainly to higher commissions from increased sales of lighting products through the lighting agent channel plus supporting three major trade shows (Light+Building in Frankfurt, Germany; Lightfair in Las Vegas; and Lightfair in Guangzhou, China). The G&A increase is due mainly to the timing of patent-related litigation fees. Net income is targeted to be $23-30m.

“Based on our prior capital additions, along with incremental investments, we believe we are well positioned from a capacity point to support significant growth,” says chief financial officer John T. Kurtzweil. “We have updated our PP&E commitment target for the fiscal year to be $65-70m.”

“Our focus remains on driving adoption through innovation, and we believe we are well positioned to continue leading the transition to LED lighting and drive growth in our business,” says Swoboda.

See related items:

Cree’s 13% quarterly growth driven by lighting acquisition

Cree grows revenue 11% in Q3, driven by Ruud Lighting acquisition

Cree acquires Ruud Lighting

Cree’s quarterly revenue grows 11%, driven by LED lighting

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